The debt/equity ratio equals which of the following?

• A. Liabilities divided by equity
• B. Assets divided by liabilities
• C. Equity divided by assets
• D. Revenue divided by expenses

Answer: (A)

Leverage shows how a business funds itself with debt versus owner investment. The debt/equity ratio specifically compares what the company owes to what the owners have invested by dividing total liabilities by total equity. This tells you how many dollars of debt exist for every dollar of equity, highlighting financial risk: a higher ratio means more debt relative to the owners’ stake, which can imply higher interest costs and greater risk in tough times. It’s not about assets, revenue, or expenses. Assets come from liabilities plus equity, so the ratio uses the two balance-sheet components that measure financing sources. So the correct description is liabilities divided by equity.